Securities Litigation, Investigations and Enforcement

The Sixth Circuit – The New Hotspot for Section 11 Suits

The Sixth Circuit recently made it easier for plaintiffs to bring securities suits brought under Section 11 of the Securities Act of 1933. In a recent ruling in Indiana State Dist. Council v. Omnicare, Inc., No. 12-5287 (6th Cir. May 23, 2013), the court of appeals revived a purported class action lawsuit against Omnicare. The suit, which had been dismissed by the District Court for the Eastern District of Kentucky, alleged that Omnicare artificially inflated its stock price by failing to disclose a kickback scheme in its registration statement.

The Sixth Circuit (which covers Kentucky, Ohio, Tennessee, and Michigan), held that the shareholders did not have to allege that the defendant executives knew that statements were false at the time they were made. In a unanimous opinion, Judges Cole, Griffin, and Gwin reasoned that Section 11 imposes strict liability for misstatements made in offering documents – whether or not the executive “making” the statement knew them to be false at the time they were made. The panel expressly refused to extend the U.S. Supreme Court’s ruling in Virginia Bankshares v. Sandberg, 501 U.S. 1083 (1991) (which requires plaintiffs to allege both objective and subjective falsity to pursue a Section 14(a) claim) to Section 11 claims. This ruling will likely embolden plaintiffs to bring Section 11 claims in the Sixth Circuit.

This decision may also draw attention from the U.S. Supreme Court, since the Sixth Circuit panel split from the Second and Ninth Circuits on the same issue. The Second Circuit’s decision in Fait v. Regions Financial Corp., 655 F.3d 105 (2011) and the Ninth Circuit’s decision in Rubke v. Capitol Bancorp Ltd., 551 F.3d 1156 (2009), both applied the Supreme Court’s rationale in Virginia Bankshares to claims brought under Section 11. In these cases, the Second and Ninth Circuits held that defendants’ communications lead to liability under Section 11 only where a statement is both false and known to be false by the defendant at the time it was made.